If you’ve ever worked for a defense contractor, you’re probably well acquainted with overhead rates. For those of you who haven’t had the pleasure of dealing with Uncle Sam on a daily basis, let me give you a brief rundown. They come in many flavors, such as:
Actual Rates
These are, as you would imagine, your actual costs. This information comes right off of your general ledger.
Projected Rates
This type of overhead rate is generally developed for an overhead rate submission to the government, or for a year-end projection. It takes into account any factors that have not been captured in your actual costs to this point. An example would be a higher than expected medical benefits expense, or an unfunded pension payment. Typically, this leads to:
Forward Pricing Rates
After projecting your overhead expenses, you’re compelled to disclose to the government any new intelligence that you’ve gathered. The vehicle used is called a Forward Pricing Rate Proposal. After this proposal is submitted, you negotiate with the government. If all goes well, the result should be a Forward Pricing Rate Agreement, or FPRA. The FPRA allows you to bid on jobs using your most current projected rates. It also establishes the billing rates for cost-type contracts.
Billing Rates
Billing rates may come from several sources: the FPRA, which covers most of your cost-type and fixed-price contracts; an FPRA which has been discounted based on an agreement with the government; and lastly, rates that have been negotiated into a specific contract, such as a time and material-type contract. Rates are established for billing time (labor hours) and material (purchased parts) by each category, such as manufacturing, engineering, or administration.
That’s a basic overview of the different categories of overhead rates. In the second part of this series, we’ll take a look at how overhead rates are calculated.
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